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Peak Oil Demand? Ha!

Strongly critical paper out from two economists writing on the subject of peak oil demand. Far from seeing demand peak in the near term in developed countries, the authors argue that demand will grow in developed countries, while growing even more quickly in developing countries, thus leading to increased per capita oil demand worldwide.

The crux of the argument is that oil demand bas been less responsive to price increases in recent years. In part, the authors argue that this has had to do with easiest substitutions for oil having already been made, in space heating and electricity generation, specifically. Much harder substitutions lie ahead, like liquid fuel for transportation, and the elasticity of demand – the change in oil demand caused by a unit increase in oil prices – will be lower going forward than it was, say, in the 1970s.

World oil demand’s shift toward faster growing and less price-responsive products and regions

Using data for 1971-2008, we estimate the effects of changes in price and income on world oil demand, disaggregated by product – transport oil, fuel oil (residual and heating oil), and other oil – for six groups of countries. Most of the demand reductions since 1973-74 were due to fuel- switching away from fuel oil, especially in the OECD; in addition, the collapse of the Former Soviet Union (FSU) reduced their oil consumption substantially. Demand for transport and other oil was much less price-responsive, and has grown almost as rapidly as income, especially outside the OECD and FSU. World oil demand has shifted toward products and regions that are faster growing and less price-responsive. In contrast to projections to 2030 of declining per- capita demand for the world as a whole – by the U.S. Department of Energy (DOE), International Energy Agency (IEA) and OPEC – we project modest growth. Our projections for total world demand in 2030 are at least 20% higher than projections by those three institutions, using similar assumptions about income growth and oil prices, because we project rest-of-world growth that is consistent with historical patterns, in contrast to the dramatic slowdowns which they project.

More here from James Hamilton on the subject, who rightly notes that the implication of 138mbpd oil demand by 2030 is, in a sense, internally contradictory. How would we get there from here from a supply standpoint?

Where I think the paper falls down, at least a little, is on changed behavior in the transportation fuel market. Yes, a steady rise in oil prices might not elicit many changes, thus causing the above per capita demand effects (were supply to somehow magically appear). But I don’t think that it what we will see. As I said in my TED talk this year, we will more likely see multiple fuel spikes much higher, perhaps $150 or more, which will have very different shock & awe effects than steady increases due to inelastic liquid fuel demand in developed countries. That doesn’t make the situation more palatable, of course, but the non-linearities in the system are the key to understanding that it won’t happen the way it is being econometrically modeled.